Adding Power, Hitachi Becomes No. 2 to I.B.M. In Mainframes

By LAURENCE ZUCKERMAN

Published: July 7, 1997

When Wells Fargo Bank decided that it needed a powerful new mainframe computer early last year, it bypassed its longtime supplier, I.B.M., the world's biggest seller of mainframes.

Instead, the bank turned to Hitachi Data Systems.

Why? Because Hitachi's newest mainframe, the Skyline, was much more powerful than anything that the International Business Machines Corporation was selling.

''We were growing; we needed bigger machines,'' said Barry Lynn, an executive vice president in charge of Wells Fargo's information technology. ''Skyline became a real simple, elegant solution for us.''

Since Hitachi Data Systems, a privately held joint venture of Hitachi Ltd. of Japan and Electronic Data Systems of Texas, introduced the Skyline 18 months ago, large companies have been snapping up the machines as fast as Hitachi can make them -- even though they can cost as much as $6 million. The demand has helped Hitachi become the No. 2 mainframe computer maker, nearly tripling its share of the market to 20 percent last year from just 7 percent in 1995, according to the Meta Group, a market research firm in Stamford, Conn.

All this while I.B.M.'s dominance, though still great, has been eroding. Big Blue's market share slipped to 73 percent in 1996 from 80 percent in 1995. The Amdahl Corporation, which was No. 2 in 1995 with a 12 percent share, slipped to third place with 7 percent.

More important, the success of Skyline has given Hitachi, which previously had a mixed record of selling to top-tier accounts, entree into the world's elite buyers of information technology -- a group I.B.M. had long monopolized. In addition to the largest banks, Skyline customers include telecommunications giants like MCI Communications, BellSouth and Deutsche Telekom; retailers like Wal-Mart, and the package-delivery giant Federal Express.

I.B.M., shaking off forecasts a few years ago of the mainframe computer's imminent demise, has continued to show surprising success selling its big machines. Still, as a result of falling prices, the company's total revenue from mainframe sales declined in 1996. By contrast, Hitachi's mainframe sales soared last year.

Hitachi Data Systems saw its total revenue rise to $2 billion in 1996 from $1.6 billion in 1995 -- largely because of the Skyline's success.

''Hitachi just walked into that marketplace and captured a large percentage of very large accounts,'' said David Floyer, a mainframe computer industry analyst with the International Data Corporation in Framingham, Mass.

Still, Mr. Floyer, other industry analysts and even some Skyline customers question whether Hitachi can capture much additional market share, in part, they say, because I.B.M.'s mainframes will soon catch up with Skyline's computing power.

But Hitachi executives are confident that they will continue to give Big Blue a run for its money.

''The future looks very bright for us,'' said Bill Tudor, director of long-range planning for Skyline.

The seeds of Hitachi's current success date back to 1993, when I.B.M., reeling from multibillion-dollar losses, decided to stop developing its line of giant, water-cooled mainframes built around a chip technology known in the trade as bipolar. Instead, I.B.M. focused on a new mainframe architecture referred to as CMOS that is based on microprocessor chips similar to those found in personal computers.

The old bipolar machines were expensive to make and operate but they were powerful. The new CMOS machines, which sell for $500,000 to $5 million, are one-tenth the cost to produce but have been much slower -- at least in their early incarnations. Indeed, last month, after four years, I.B.M. introduced the fourth generation of the new-style machines, which finally equal the power of its last bipolar machine.

That left an opening for Hitachi, which developed Skyline: a hybrid machine that offered the power of the old-style mainframes with many of the cost savings of the new silicon-chip-based designs. The most powerful of the current Skyline mainframes can process 780 million instructions a second, or MIPS, compared with 450 MIPS for the powerful CMOS machine from Big Blue. Later this year, Hitachi said it would introduce a model that would be as fast as 975 MIPS.

In 1993, when much of the world believed that mainframes would soon be replaced by networks of smaller computers, Hitachi's strategy looked quixotic. Even I.B.M. predicted a 50 percent decline in mainframe sales in 1994.

But the mainframe has proved to be resilient. I.B.M. has drastically lowered its prices and improved the operating-system software. As a result, while many companies are now developing new applications on networks of smaller computers, their large, critical applications, like telephone billing and customer accounts, remain on mainframes. And as companies have merged and grown, so has the need for more mainframe computer capacity.

I.B.M.'s strategy for meeting the increased demand for mainframe power is something called parallel sysplex, which links its CMOS machines into large clusters that work in tandem. But many I.B.M. customers have been reluctant to adopt the technology because it is new and requires new software.

Instead, many I.B.M. customers solved their capacity needs by buying more powerful machines -- from Hitachi.

Linda Sanford, the head of I.B.M.'s mainframe business, calls the Skyline "a temporary stopgap.'' She said that the power of CMOS machines, much like personal computers, is doubling every two years, and will surpass the Skyline before too long. By then, she said, most Skyline customers will have adopted parallel sysplex.

Hitachi and some industry analysts disagree. ''We're confident that for the next three to five years our technology will have better performance than CMOS,'' said Steve M. West, the president and chief executive of Hitachi Data Systems.

Since Hitachi is already selling as many Skylines as it can make, few analysts forecast additional strong market share gains for Hitachi next year. The Meta Group estimates that Hitachi's share will remain 20 percent. Additional growth will have to come from sales of CMOS machines, which, paradoxically, Hitachi builds using I.B.M.'s chips, a deal that Big Blue struck in the early 1990's.